Question

Explain the cost curves of the firm. In terms of economies of scale, why would a firm sometimes want to expand output and sometimes not want to expand output?

Answer 1

With the increase in production levels if the average cost curve goes on decreasing or having a negative slope then it can be considered as economies of scale and with increase in production levels if the average cost curve goes on increasing or having a positive slope at a point then it can be considered that the firm is experiencing diseconomies of scale. This is shown in the figure below. during diseconomies of scale the average cost keeps on increasing and if the average cost level certainly exceeds the price of the product then the firm will incur a loss on the whole and this is the reason why beyond a point where a firm is experiencing diseconomies of scale the form does not want to increase its output and as long as the price is less than average total cost the form keeps on increasing to get more and more revenue.

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